Has Sirius XM Radio Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Sirius XM Radio (NASDAQ: SIRI  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sirius XM Radio.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

30.6%

Pass

 

1-Year Revenue Growth > 12%

11%

Fail

Margins

Gross Margin > 35%

62.6%

Pass

 

Net Margin > 15%

102.9%

Pass

Balance Sheet

Debt to Equity < 50%

58.6%

Fail

 

Current Ratio > 1.3

0.81

Fail

Opportunities

Return on Equity > 15%

142%

Pass

Valuation

Normalized P/E < 20

60.80

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Sirius XM Radio last year, the company has picked up a point, although the gain came from rising net margins resulting solely from a big one-time tax benefit. Still, the shares have soared, rising nearly 60% over the past year.

Sirius' strength has resulted largely from its ongoing appeal to its satellite-radio customers. With the company having implemented a 12% rate increase a year ago, many feared that Sirius would lose subscribers in the same way that similar moves at Netflix (NASDAQ: NFLX  ) enraged customers. Yet the higher rates haven't increased turnover, and net subscriber additions have remained strong.

Moreover, the threat of streaming radio had little of the negative impact on Sirius that many analysts had expected. Pandora (NYSE: P  ) has grown at a much faster clip than Sirius in terms of active listeners, and with the entrance of Microsoft's (NASDAQ: MSFT  ) Xbox Music and Apple (NASDAQ: AAPL  ) expected to follow suit in the near future, streaming is only going to get more popular, and Sirius will need to step up with its own offering to defend its turf.

One lingering question Sirius investors need answered is what major shareholder Liberty Media intends to do with its big position in the company. With some expecting an outright takeover while others look for Liberty to divest its stake through a spinoff, clarity would help remove one source of uncertainty for the company and its shareholders.

Sirius has plenty of potential to keep reaching for perfection, especially if it can keep growing and find ways to monetize a streaming service. Shares are highly valued on an earnings-multiple basis, but for growth investors, Sirius remains an attractive stock even at current levels.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest. 

What it all comes down to for Sirius XM is that despite its huge gains since 2009, there is still some healthy upside to be had if things go right for it -- and plenty of room for it to fall if things don't. Get more of the inside scoop about Sirius XM in our premium research report on the satellite radio giant. To get started, just click here now.

Click here to add Sirius XM Radio to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 02, 2013, at 4:58 PM, lanciab wrote:

    You can analyze all day to justify your position on SIRI but two years ago when this stock was under a $1 your analysis would have made more sense. Yet the stock is up 200 percent now.

    And now that your analysis applies less to the same company than two years ago how does your article make any sense???

    Good luck. This is a PERFECT stock.

  • Report this Comment On January 02, 2013, at 7:43 PM, zukerman wrote:

    What page in Stock Picker for Weenies did you find these parameters. One suggestion would be to do a little more work and compare Sirius to it's so called competitors instead of pasting this same chart with daily changes. Well, you get what you pay for.

  • Report this Comment On January 02, 2013, at 7:55 PM, duze54 wrote:

    Are you trying to cover your short?

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